Impact of idiosyncratic and macroeconomic risks on capital structure: evidence from SADC countries

Abstract

PurposeThe purpose of this study is to investigate the impact of idiosyncratic and macroeconomic risks on capital structure on SADC countries.Design/methodology/approachEmploying data from the African Financials database, the analysis is conducted over a ten year period spanning from 2009 to 2018 for 309 companies. Unit Root Fisher Chi-Square test and Granger Causality test were employed to test for unidirectional and bidirectional relationships cross-sectionally. To resolve endogeneity issues, System GMM was used as main topology for panel regression analysis.FindingsThe study confirmed that companies become risk averse when there is an increase in idiosyncratic and macroeconomic risk and therefore take less leverage. According to the perking order theory, a higher variability in earnings shows that the bankruptcy probability amplifies. Hence, institutions with high income employ more internal finance during periods of high idiosyncratic and macroeconomic uncertainty thereby lowering leverage. A positive significant and statistically relationship is also confirmed between idiosyncratic risk and leverage in Botswana, South Africa and Tanzania. Companies with higher leverage make riskier investment in line with the trade-off theory. In short, executives from the SADC region consider more importance to fluctuations in risk while accelerating or diminishing leverage in their capital structure.Originality/valueThe study is among one of the pioneering work underpinning the idiosyncratic risk and macroeconomic risk on capital structure and relying on a large number of companies across the SADC region. In this respect, it adds contribution to the existing literature on risks and capital structure to the socio-economic goals of the SADC region.

Impact of risk on capital structure adjustments: Evidence from the African markets

“…According to Baum et al (2009), when risk varies over time, lenders fail to assess the creditworthiness of companies. Subsequently, this contributes to external credit funding, and managers rely on internal finance, namely retained earnings or liquid assets, to solve their financial difficulties (Amelot & Agathee, 2021). When cash flow risk is raised, credit risk is boosted, and the anticipated bankruptcy expenses are elevated.…”